Friday, November 14, 2008

ProLogis, REITs and the Denominator Effect
ProLogis (PLD), the company started by some of Dividend Capital's principals, is having a tough week and has lost nearly 90% of its value this year. Its CEO resigned and it announced a dividend cut of more than 50%. There are plenty of articles on PLD and I am not going to link to them, just type in its symbol in or the other big financial news sights and you'll receive options for multiple articles. At June 30, 2008, PLD's ratio of long-term debt to total assets was 53%. This ratio does not strike me as out of line for a publicly traded REIT.

ProLogis', and other REITs, have likely seen their assets drop while their debt has stayed fixed. The Wall Street Journal had an article the Denominator Effect earlier this week, in respect to pension funds. The point of the article was that pensions have seen their real estate exposure increase because of the drop in stock prices. This does not account for, as the article states, any change in real estate values. REITs are going to experience the same Denominator Effect for their balance sheets, and what were considered moderately leveraged companies are going to have larger debt ratios than they have had historically.

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